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Wells Fargo’s Problem Emerges: $17 Billion In Junk Energy Exposure

Goldhedge

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#1
Wells Fargo’s Problem Emerges: $17 Billion In Junk Energy Exposure
Tyler Durden on 01/17/2016 18:37 -0500

When Wells Fargo reported its Q4 earnings last week, the one topic analysts and investors wanted much more clarity on, was the bank’s exposure to oil and gas loans, and much more color on its energy book over concerns that Wells, like most of its peers, was underestimating the severity of the upcoming shale default wave.

And while the company’s earnings call indeed reveals that things are deteriorating rapidly in Wells energy book, perhaps an even bigger concern for Wells investors, which just happens to be the largest US mortgage lender, should be what is going on with its mortgage book. The answer: nothing. In fact, at $64 billion in mortgage applications in the quarter, this was not only a major drop from Q3, but also the lowest since the first quarter of 2014.



Needless to say, without significant growth in Wells' mortgage pipeline and originations, there can be no upside to Wells Fargo stock, meanwhile one can kiss the so-called housing recovery goodbye for the final time, because now that the US Treasury is cracking down on criminal and money laundering "all cash" buyers, we fully expect the housing industry to grind to a near halt in the coming 2-3 quarters.

That covers the lack of upside. As for the substantial downside, here are the key parts from Wells Fargo's conference call discussing the bank's energy exposure.

First: how big is Wells' loan loss allowance for energy:

We've considered the challenges within the energy sector and our allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to our oil and gas portfolio. It's important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

Then, from the Q&A, how much is Wells' total loan exposure, its fixed income and equity exposure toward energy:

I would use $17 billion as outstandings for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities.

In other words, a 7% loan loss reserve toward energy, perhaps the highest on all of Wall Street.

Then, here is the breakdown by services:

We're focused on the whole thing. Half of those customers - half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don't view the credit exposure as quite the same.

But the "downside risk" punchline was the following exchange with Mike Mayo:

<Q - Mike L. Mayo>: What percent of the $17 billion is not investment grade?

<A - John R. Shrewsberry>: I would say most of it. Most of it.

<Q - Mike L. Mayo>: So most of the $17 billion is non-investment grade.

<A - John R. Shrewsberry>: Correct.

To summarize: $17 billion in oil and energy exposure, which has a modest $1.2 billion, or 7%, loss reserve assigned to it (the highest on the street mind you), and which is made up "mostly" of junk bonds.

Why could the be concerning? Well, one reason is that junk yields just surpassed the all time highs set just after the Lehman bankruptcy.



In retrospect we can see why the Dallas Fed told banks to stop marking assets to market.

As for Wells, Warren Buffett may want to take another bath in the coming days.

Source: Wells Fargo Q4, 2015 Conference Call

http://www.zerohedge.com/news/2016-...oblem-emerges-17-billion-junk-energy-exposure
 

the_shootist

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#2
Oh swell, they own my mortgage...is there ANY bank that actually does things right?
 

Buck

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#3
Oh swell, they own my mortgage...is there ANY bank that actually does things right?
It'll all be right until it isn't and even then, it'll be someone else's fault
Don't worry, you'll be able to keep your house if you want to
 

latemetal

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#4
They never learn, bring back "Glass-Steagal"? or whatever that law was.
 

Uglytruth

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#5
bernie want's it reinstated & shillery don't. At least I think that's what they were shreking about last night when I passed by the channel.
 

REO 54

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#6
The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions:

We thank the Dallas Fad for their prompt attention to this important matter. After all, as one of our sources commented, "If revolvers are not being marked anymore, then it's basically early days of subprime when mbs payback schedules started to fall behind." Surely there is nothing that can grab the public's attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution.
Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.

Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group - an odd background for a regional Fed president - took the time away from its holiday schedule to respond to Zero Hedge.

This is what it said.


Dallas Fed– Verified account ‏@DallasFed

No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://twitter.


As such we understand the Dallas Fed's desire to avoid a public reaction and preserve semantic neutrality by refuting "such guidance."

That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what "guidance" the Fed is referring to.

  • Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, met with U.S. bank and other lender management teams in recent weeks/months and if so what was the purpose of such meetings?
  • Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, requested that banks and other lenders present their internal energy loan books and loan marks for Fed inspection in recent weeks/months?
  • Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, discussed options facing financial lenders, and other creditors, who have distressed credit exposure including but not limited to:
    • avoiding defaults on distressed debtor counterparties?
    • encouraging asset sales for distressed debtor counterparties?
    • advising banks to avoid the proper marking of loan exposure to market?
    • advising banks to mark loan exposure to a model framework, one created either by the creditors themselves or one presented by members of the Federal Reserve network?
    • avoiding the presentation of public filings with loan exposure marked to market values of counterparty debt?
  • Was the Dallas Fed, or any other members and individuals of the Federal Reserve System, consulted before the January 15, 2016 Citigroup Q4 earnings call during which the bank refused to disclose to the public the full extent of its reserves related to its oil and gas loan exposure, as quoted from CFO John Gerspach:


    "while we are taking what we believe to be the appropriate reserves for that, I'm just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That's just not something that we've traditionally done in the past."

  • Furthermore, if the Dallas Fed, or any other members and individuals of the Federal Reserve system, were not consulted when Citigroup made the decision to withhold such relevant information on potential energy loan losses, does the Federal Reserve System believe that Citigroup is in compliance with its public disclosure requirements by withholding such information from its shareholders and the public?
  • If the Dallas Fed does not issue "such" guidance to banks, then what precisely guidance does the Dallas Fed issue to banks?
Since the Fed is an entity tasked with serving the public, and since it took the opportunity to reply in broad terms to our previous article, we are confident that Mr. Kaplan and his subordinates will promptly address these follow up concerns.

Finally, in light of this official refutation by the Dallas Fed, we are confident that disclosing the Fed's internal meeting schedules is something the Fed will not object to, and we hereby request that Mr. Kaplan disclose all of his personal meetings with members of the U.S. and international financial system since coming to office, both through this article, and through a FOIA request we are submitting concurrently.


http://www.zerohedge.com/news/2016-01-18/fed-responds-zero-hedge-here-are-some-follow-questions


Wonder if the Fed read ZH comment section, lol
 

Goldhedge

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#7
If Wells Fargo has your loan and theres a 'problem' it's going to be sold to another 'collector'.
 

michael59

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#8
I should put this in the joke of the day but darn it every time I read, hear or think of Wells Fargo i just sniker.....

So they caught Black Bart the stage coach robber and darn if they didn't install him as president of Wells Fargo Bank
and now you know the rest of the story..... sorry just had 2
 

Agavegirl1

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#9
Kwap! They own my new husband's mortgage, I have no debt. I have embarked on a plan to make us debt free in 8 years but ...I am uncomfortable marrying into any debt. Since my wedding in September, I now have a $99.820 mortgage and a truck loan on a Ford F150. I hate this feeling. But, I love the man and he listens well to me on how to get out of debt quickly. I own my property outright and also have a bunch of assets available for barter. I do have after tax investments available to make us debt free. They are quite conservative but to "cash them out" would cost a lot. I think I will let him continue to pay this mortgage until I see an issue at which time I will intervene.

Heavy Sigh, why isn't this just easy anymore.
 

Usury

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#10
Kwap! They own my new husband's mortgage, I have no debt. I have embarked on a plan to make us debt free in 8 years but ...I am uncomfortable marrying into any debt. Since my wedding in September, I now have a $99.820 mortgage and a truck loan on a Ford F150. I hate this feeling. But, I love the man and he listens well to me on how to get out of debt quickly. I own my property outright and also have a bunch of assets available for barter. I do have after tax investments available to make us debt free. They are quite conservative but to "cash them out" would cost a lot. I think I will let him continue to pay this mortgage until I see an issue at which time I will intervene.

Heavy Sigh, why isn't this just easy anymore.
Can you sell his house and live in yours? Use the proceeds to payoff the debt. My 2 cents....
 

Agavegirl1

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#11
Can you sell his house and live in yours? Use the proceeds to payoff the debt. My 2 cents....
No, unfortunately my house is our lake home and bug out location and retirement place that is about 100 miles from his work and that does not compute to "reasonable" He is not "underwater" so he could refinance. I will follow closely because he will not. There is one other option that will cost us a lot of upfront cash. I can cash out my after tax investments worth about the amount of the mortgage and bail him out but I receive income from them currently. I think his interest is more than my investment income bby a few hundred dollars a year. We will do a spreadsheet.
 

Uglytruth

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#12
Since the Fed is an entity tasked with serving the public,

Let me help you with this.

Since the Fed is an entity tasked with ENSLAVING the public,
Since the Fed is an entity tasked with SCREWING the public,
Since the Fed is an entity tasked with ENDEBTING the public,
Since the Fed is an entity tasked with BREAKING the public,
 

Aurumag

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#13
The Dallas FED wasn't lying when they claimed NOT to have met with the bankers.

That is the job of the Plunge Protection Team and it's agents.